Cost and Earning Structure of Logging Industry in the State of Sabah

Abstract

The logging industry in Sabah is not widely understood owing to a lack of
published information concerning its activities even though it is one of the most
important sectors to the state economy. Hence, this study was undertaken to
provide a better understanding of the cost and earning structure of the logging
business in the state of Sabah. Data used in this study were collected from logging
survey of 31 logging contractors in the state. Due to lack of information provided
by the respondents, only 10 questionnaires were used in the analysis. The
questionnaire contains information required in this study with regards to costs,
production and market prices. The results show that variable cost (direct cost)
components constitute about 54 percent (RM66.66/m3) of the total logging cost.
The most important cost components are the cost of logs transportation, cost of
royalty and cess payment, and cost of skidding. This is due to logging activities
been done further inland into the hilly and mountainous areas. Whilst the fixed cost
(indirect cost) constitute about 46 percent (RM56.98/m3) of total logging cost.
Subsequently, the variable cost gives a higher coefficient of variation (13.20
percent), compared to that of the fixed cost (11.73 percent). The average total
production cost obtained in this study was RM 123.64/m3. The average percentage
of net profit over production cost and sales were estimated at 144.2 percent and
71.9 percent, respectively. This indicates that the logging industry in Sabah is
highly profitable. In this study, the State Government is capable of capturing a
large portion of the economic rent averaging about 93 percent o f the total potential
rent. Even though the State Government is capable of capturing large portion of the
economic rent in the logging industry, about 80 percent the logging contractors still
able to gain windfall profit averaged 7.4 percent aside from the profit margin. The
policy implication of the study suggests that the existing mechanism of forest
allocation system needs to be reviewed in order to ensure that the total rent
collected is equated to the stumpage value.